By Peter Bofinger, Professor for Monetary and International Economics at Würzburg University and a member of the German Council of Economic Experts. Originally published at the .

Hayek’s Model of Currency Competition

More than forty years ago, Nobel laureate Friedrich von Hayek published a small book in which he called for the “denationalization of money.” For him, high inflation rates in all countries were proof that states were abusing their monopoly on issuing banknotes, and that only private money in competition could guarantee stable money. Hayek was more concerned with the regulatory principle of competition than with the question of how a competitive monetary system could be concretely shaped.

The success of Bitcoin and other cryptocurrencies today shows that there is indeed a market for such a private issue of money. It is however more than questionable whether a system with private currencies can actually replace the state-organized monetary systems and whether in the end a stable monetary system will emerge.

Mr. Smith Issues His Own Currency

The mechanisms of private money production, which at first glance are very complex, will be illustrated by a simple example. Mr. Smith decides to participate in the currency competition. He prints 1 million notes bearing “100 Valuecoin.” On the back it is expressly pointed out that the holder of such a note has no legal claim against Mr. Smith.

Now Mr. Smith can try to sell his notes against the euro. He starts with an exchange rate of 1: 1. But why would anyone come up with the idea of spending 100 euros on a piece of paper that has no intrinsic value and promises nothing? Mr. Smith refers to the example of Bitcoin, in which the quantity is also limited. By comparison, there is no upper limit on government currencies. The Valuecoin could thus have the advantage to gain value against the state money like Bitcoin. Soon 100 Valuecoin could be worth much more than 100 Euro.

Now, one could wonder, why only Mr. Smith should have the privilege to make money out of nothing. Again, it is geared to the model of Bitcoin. He decides not to put all the notes into circulation himself and to establish a mechanism for the issuance of Valuecoin, which ensures that the Valuecoin money supply can only increase gradually.

Thus, he organizes a dice game with friends once a week. Whenever a participant rolls a one on 4 dice simultaneously, he receives 100 bills. In order to prevent the bills from circulating too fast, over time, the number of bills received on successful dice rolls is reduced. So after the first year, participants only receive 50 bills for a successful throw. After that, the amount reduces further. In addition, as the number of participants in the dice rounds fluctuates, the level of difficulty is increased when a particularly large number of visitors are present. Then, no longer four but five dices are used and “five one´s” must be rolled. As more and more interested parties are expected to attend the dice game over time, this mechanism also makes it increasingly difficult for those involved to create new Valuecoins.

Mr. Smith assumes that the knowledge of such a mechanism, which ensures a gradual expansion of Valuecoins, in addition to the fixed ceiling, also helps to make his private currency attractive.

Overall, this mechanism ensures that the benefit of being able to exchange worthless bills for government money is not left to Mr. Smith alone. Rather, it is given to the participants of the dice game, who must acquire the Valuecoin notes by strenuous dicing. This coincides with the Bitcoin model, where miners have to solve highly complex computational tasks, which requires huge computing power and enormous power consumption. Since you get to the notes faster in the beginning, those who are participating from the beginning are favored. This, of course, especially benefits Mr. Smith as the initiator of the whole scheme.

Mr. Smith’s Currency Becomes Digital

Nothing fundamentally changes in the mechanisms described so far, when Mr. Smith does not organize his money issuing via printed bills, but digitally via accounts. He sets up a centralized Valuecoin settlement system, where all holders of Valuecoins keep an account. For a successful throw, they will then receive no bills, but the Valuecoins will be credited to the participants account in the clearing system of Mr. Smith. By buying Valuecoins against the euro from the dicer, outsiders can also open an account on the Valuecoin billing system. This makes the private money system perfect. Digital transfers can now be made between account holders.

With the digitalization of the whole scheme, also the dice game evenings are abolished. Now, anyone can build up Valuecoin balances by participating in the online game.

The Accounting System of the “Distributed Ledger”

What distinguishes Mr. Smith´s Valuecoin from Bitcoin so far is the central accounting system he manages. Instead, Bitcoin uses a decentralized system, the “distributed ledger.” In such a system, there is no central accountant anymore. Rather, in principle, each participant can make bookings in the ledger. However, those participants with higher computational power have an advantage, as they might be able to perform more throws (“proof-of-work”). In this way, the organizer of the whole thing disappears behind the scheme he has created. Thus, for outsiders, it is no longer clear that Mr. Smith is the creator of Valuecoin.

A special feature of this system is that it is completely transparent not only to the participants but also to outsiders. With a “distributed ledger” all participants can now see the e.g. that Mr. Roberts has made a transfer of Valuecoins to Ms. King. But that’s not all. You can also see that Mr. Roberts, has received 100 Valuecoin from Ms. Gordon, who has earned them on a dice evening. Thus, in principle for every Bitcoin its entire history can be determined from the transactions recorded in the “distributed ledger.” In principle, an encryption (“public key”) ensures that the anonymity of the parties to outsiders remains guaranteed. In addition, each participant also has a “private key,” which is similar to a PIN-code required to trigger payment transactions.

For its participants, however, the “distributed ledger” can be more of a curse than a blessing. Since all transactions can be viewed by all participants, with the knowledge of the “wallet address” of a participant one can . This is similar to when you as a customer of a savings bank with the knowledge of the account number of another customer could get insight into all his account transactions. The “wallet address” can be computed using another person’s “public key.”2 The “wallet address” of a Bitcoin participant can already be obtained by receiving a Bitcoin transfer from him.

Mr. Smith’s New Clothes

The complexity of the “distributed ledger” and the dice game (“mining”) process has the great advantage for Mr. Smith that the basic mechanism of the whole scheme is pushed completely into the background. Mr. Smith has managed to find buyers for his worthless bills and—in the digital version—his literally created Valuecoin balance holders, who are prepared to spend good government money to get even more Valuecoin. The Valuecoins have no intrinsic value, but as long as no one notices, they can rise enormously in price. But as with the fairy tale of the “Emperor’s New Clothes,” it only takes a small moment of realization and the whole system collapses.

Of course, there is also no promise of redemption from central banks for national banknotes. However, they have the distinct advantage over private currencies that sellers cannot deny them as “legal tender” and that they can be used at any time to pay taxes.

But what about the advantage of the fixed upper limit for the issue of Valuecoins and Bitcoins, which limits the circulation of individual crypto currencies? Since the model of monetary competition inherently provides for a large number of private currencies, there is no limit to the total circulation of money issued by all cryptocurrencies. And unlike government-issued currencies, there is no guarantee that this collective issuance process will generally follow a macroeconomic rationality.

From this perspective, a monetary system with national currencies issued under a sovereign monopoly should end up being more stable than a system of currency competition with a large number of currencies issued by private actors. And in terms of data protection and banking secrecy, the “distributed ledger,” which forgets nothing and at least makes everything transparent for professionals, proves to be highly questionable anyway.

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52 comments

You have to define what is money —- money can be cigarettes in prison, or telephone minutes in Kenya, or eggs in Venezuela. So Money is really what people are willing to trade their labor for or sell a possession for – right? Which basically means that money is what ever people believe it to be — of course there are certain characteristics that make certain forms of money like gold better than say eggs. Gold doesn’t ever spoil, it is very rare and difficult to mine, it can be broken in many pieces, it can’t be counterfeited, by regardless gold is just the object or the store of value and the value is people’s labor. Bitcoin has many characteristics of gold and their is a finite amount and it is open source ledger allows everyone to see exactly how much there is —— I completely disagree with this article, anyone can make a currency, just like anyone can want to trade in shells, question is who will accept the currency that you are using. Adoption is the biggest think, the hardest thing for bitcoin to go was to go from zero to $1 — it has all the characteristics that will make it a better store of value than gold. Gold price is manipulated because amount of gold holdings is opaque can’t do this with bitcoin and this what makes it so amazing.

Um, so what are the advantages of Bitcoin over national currencies again….? National currencies are also a store of value, don’t spoil, are difficult to produce (in that not anyone can issue more of the currency), and can be subdivided. So all of the “advantages” of gold, and Bitcoin.

I can see the logic of cryptos in regards to stores of value, as investments, but them being a store of value is ultimately based on the influx of fiat currencies. I don’t think they are different in that regard to any other type of financial investment. But as mediums of exchange, in regards to day to day life, thinking that cryptos could take the place of dollars, Yen, RMB, to me, is utopian. How would day to day life be in a crypto world, especially for working stiffs? Cause we can’t analyze how this would work only from the perspective of investors with money like Max Keiser or something. I can’t imagine life for working people during the free banking era. And why would the state agree to accept crypto currencies in regards to paying taxes, and how realistic would it be to pay taxes in multiple cryptocurrencies? They fluctuate wildly in value, which could cause massive problems for people trying to pay off their debt to the state, and the state would struggle to figure out whether or not someone was paying what they owed in taxes. And that all leads to the unit of account. You go to the store now, and you want to know how much something costs, it is priced in dollars. Want to know how much something is worth relative to something else? Dollars do it for you (not going to get into actual value, which would have to take into account non-market impacts). In a crypto world, with no more dollars, how much is a pair of pants worth? There is no universal unit of account, so a pair of pants could have potentially hundreds, or thousands, of different values.

To me, it makes much more sense to democratize money creation, to create money through the Treasury and not the Fed and to support public banking. Something like the Bank of North Dakota nationally, which would be transparent and under the control (at least indirectly) of the people. It isn’t perfect and comes with its own risks, but it is better than the dystopia the crypto types want to bring about. I, personally, don’t think they have thought through what life would be like under their ideal.

Bitcoin is also at the mercy of nations and shadowy bitcoin oligarchs, so again there is no difference. Membership of the respective groups of oligarchs may differ — which is probably the primary motivation of the Bitcoin people.

“characteristics of gold” – except for the usefulness in electronics, and, for some aesthetical value. And the fact, that, if we Musk ever gets to mine asteoroids, the gold will be as cheap as, well, whatever.

Gold is NOT a store of labour (you say “store of value and that value is labour”). Store implies you can put it in, and take it out. Please, show me how I can, on a Robinson island, take labour out of gold. I can take electricity out of a battery, energy out of a galon of oil, but I can’t see how I could take any labour of of an ounce of gold.

Even your dollars aren’t store of labour. They are the only way to settle tax liabilities you’re likely to incur to Uncle Sam. If you don’t settle them, he will house and you, but not very well (well, except if you’er rich, in which case he will say “be nice!” and go away). So they are backed by the force. Not gold, not labour, no nothing nice – but really a promise of violence.

As for commodity money (of which bitcoin is an extreme example). Silver tarnishes, yet was heavily used as money – pretty much all over the world, much more than gold. Platinum is rarer, fairly stable, was around since ancient Egypt, but wasn’t used as money. Use of gold as THE money is relatively recent.

And implying in your last paragraph that “[…] is manipulated […] can’t do this with bitcoin” – you’re extremely naive if you believe that bitcoin price is not manipulated.

I completely disagree with this article, anyone can make a currency, just like anyone can want to trade in shells, question is who will accept the currency that you are using. Adoption is the biggest think, the hardest thing for bitcoin to go was to go from zero to $1 — it has all the characteristics that will make it a better store of value than gold.

First off, you’ve presented two different concepts here. First you’ve argued that the key is adoption of the use of the currency, then argue that Bitcoin has achieved this because of its store of value. Currencies are not stores of value in and of themselves, they are mediums of exchange that represent a value; I can express my stock holdings in terms of dollars, but it’s the stocks themselves that have value. So the value is in its ability to effect an exchange.

So what value does Bitcoin have in that regard? As Alex V pointed out, most of what’s valuable in Bitcoin is found in dollars, except you can’t use Bitcoin to pay taxes and it has no guarantee of being legal tender. Bitcoin is relatively anonymous, at least with regards to online transactions, and is easy for international use. But other than the paranoid, what is that good for?

Which leads to the second problem: even if a currency sees adoption and thus gains value as an exchange medium, the value there has to exceed the risk of using it. Dollars carry practically no risk. But if your crypto is primarily getting used for drugs, illegal weapons, human trafficking, assassinations, etc., even if you yourself are not using it for that, there’s a risk that the authorities will shut down the currency and then you’re left with a worthless computer file. Likewise if there’s determined to be fraudulent manipulation of the crypto.

Money can be a store of value (a horde). So can stocks or gold or whatever, but you can also hold money in a bank account. That is one of the uses of money, along with measure of price, medium of exchange, etc… Sorry to be pedantic.

A currency needs to have credibility and acceptance. The US dollar is accepted by the government to pay taxes, fees, and insurance (Social Security). In turn they pay for services rendered to the government in US dollars. They also set up a system to keep the currency reasonably stable over time (a partial failure in this was late 70s-early 80s).

Gold has been historically used as a store of value for several millennia by Eurasian and African countries. Many areas in the rest of the world did not recognize it at all as currency. Hudson Bay blankets are marked with points on them for how many beaver pelts the First Nations’ people need to trade to get one:

The Hudson Bay Company effectively turned beaver pelts into the first corporation defined currency but they have now simply turned to accepting fiat currency – I don’t think you can walk in The Bay and barter for a blanket by handing the clerk four beaver pelts despite the points still being on the blanket – they will insist on cash or credit card. Beaver pelts were extremely valuable in the 1600s and 1700s because they were turned into felt used for fine hats. However, beaver felt hats are generally not used in fashion these days and are often frowned upon, so the value of beaver pelts has declined (inflation – more pelts needed to buy goods).

Canadian Tire money is a fascinating example of modern private currency with various challenges of acceptance by various entities, calculating and paying taxes, etc. It is now going through a transition as it is partially turned into a rewards card program instead of physical bills that could be exchanged like regular cash (is it now a crypto-currency?). Previously, Canadian Tire money could be used in many small towns as a form of cash for hiring menial labor or in mom-and-pop stores as the recipients could use it to buy things at a Canadian Tire store.

Prisoner-of-war camps, prisons, etc. are examples of cultures where regular cash money has almost no meaning, so items like cigarettes and chocolate became currencies as they had intrinsic value and were desirable in their own right. However, once the war was over and the prisoners-of-war released, they reverted to just being cigarettes and chocolate bars again.

Ya I know someone who used canadian tire money in Mexico. Told them the old guy with the mustache and tam o’shanter was the president. I bet it’s still circulating.

CT money has been crapified to the point of worthlessness – you used to get 3 or 4 and I remember back in the days of 18% interest rates even 5 cents for every dollar if you paid in cash. Now cash is disincentivized- through low interest rates but also as policy so CT a rational actor has adopted a neoliberal information gathering approach requiring use of a credit card and more “points” if you use their Co-branded card.

Anyway I still buy fishing gear and rubber boots at CT but I never use cash and back in the 70s and 80s it was cash all the way.

> money can be cigarettes in prison, or telephone minutes in Kenya, or eggs in Venezuela

No, cigarettes / minutes / eggs would be classified as trade goods used in barter transactions. They aren’t money.

You can’t pay your taxes in cigarettes or phone minutes. You can’t force a seller to accept them. You don’t denominate a bank account in egg units or transact in them. Graeber covered this in Debt. Barter only takes place in specific circumstances: where a money system already exists but actual money can’t be obtained for whatever reason.

> Barter only takes place in specific circumstances: where a money system already exists

Are you saying that money existed before barter? That seems like an odd conclusion. I always imagined the concept of money emerged from barter — “you can take this manky chicken for your sharp tool, but wouldn’t you rather take five of these beautiful seashells that you can hold onto and use later to trade for fresh fish, or trade with that tribe over there, which also recognises the worth of these seashells”.

> You can’t pay your taxes in cigarettes or phone minutes. You can’t force a seller to accept them. You don’t denominate a bank account in egg units

These things do not define money per se. They explain the use of a type of money locally (i.e. a national currency), but they’re not fundamental features of money.

That’s what Econ 101 books say, yes. It’s also completely wrong. It’s a nice story that has been around since Adam Smith, and is completely contradicted by historical, archaeological, and anthropological evidence.

The traditional myth is that it went ‘barter > money > credit’, but in reality it went ‘credit > money’, with barter only happening between groups that don’t trust each other, or in societies already familiar with money that have broken-down (or, like prisons, are largely cut off from money).

Yes, we have to define what is money. I am just a layman so I can only think my way painfully forward on this. I don’t think all the examples you gave are money. Eggs in Venezuela will stay good enough to eat for only a while. If I hold them for “spending” later, as if they were “money”; and i discover that I waited until they have gone rotten; then my rotten eggs in Venezuela are not money. In the same way, my telephone minutes in Kenya are not money to someone who does not have a phone, or who has no one to call.

So, yes. We have to be clear on what money is and what money is not.

If you really believe that bitcoin “is” money, you might want to invest in bitcoin. Do you reaaaallllly believe that bitcoin “is” money? Reaaaaallly?

“Gold price is manipulated because amount of gold holdings is opaque can’t do this with bitcoin and this what makes it so amazing.”

I love the idea that buttcoin isn’t opaque and isn’t being manipulated. How can you possibly look at reality and think this is the case?

Anyway, it’s funny that you start by saying we have to define money, and then proceed to mostly talk about gold. Gold isn’t money. It’s an asset you can invest actual money into. You talk about ‘store of value’, but what is that value being measured in? Hint: not gold.

I would agree that this is what cryptocurrencies should be compared to, however. Since they’re nigh useless as actual money for anything other than buying drugs or hiring a hitman. This is what people who cheer when buttcoin prices go up and herald it as the future of money fundamentally don’t get. These digital ‘currencies’ aren’t behaving like money. They’re behaving like investment assets. If they have any future (and I don’t think they do, they’re digital tulips) it will be as something you can put real money into. But they have no future as money in and of themselves.

“Of course, there is also no promise of redemption from central banks for national banknotes. However, they have the distinct advantage over private currencies that sellers cannot deny them as “legal tender” and that they can be used at any time to pay taxes.”

So now we have one of Germany’s leading “wise men” acknowledging a fundamental MMT point – namely, that taxes drive money, not the other way around. And cryptocurrencies ultimately are doomed unless governments are willing to give up their monopoly power to issue currency, which seems highly unlikely

To settle a transaction on the blockchain, miners have to use enormous computing power and electricity. Money that comes out of their pockets. In exchange, they are rewarded with new bitcoins. What happens when we reach the upper limit of bitcoin production? When the miners will no longer be rewarded with new bitcoins. How will new transactions be settled? What will happen to the value of bitcoins?

Jon – Even with a cursory look into the operation of bitcoin you’d know there are transaction fees which, in addition to the newly minted bitcoins, are awarded to the miner. Additionally, the last bitcoin won’t be mined for another 100+ years.

It doesn’t matter when the last bitcoin will be mined. The point is that the number of mined coins per time and therefore mining profit is constantly going down.
Meaning the percentage of profit from mining is always going down and transaction profit always going up.

Then there is the upper limit of transactions. Where are we right now, 5 or 8 per second up from 2,5 or so? Never more, in the whole network?
Cryptocurrencies do not scale and their transaction costs are atrocious. Transaction time is equally bad: a transaction is only secure if several blocks in the blockchain have been added since.
All of this means current cryptocurrencies are totally useless as a general currency system for a modern reasonably big economy.

Miners are doing just fine – they are more profitable now than ever before (except maybe during the price run up at the end of 2017). So far, price has more than made up for the reduction in block rewards, hence the hashrate is more than ten times what it was one year ago.

The next halving is May 2020. I doubt we’ll see any reduction in the hash rate.

You’re quite right that blockchains do not scale well, but Bitcoin and cryptocurrencies more generally are not finished products. It would be foolish to write them off. There is an awful lot of bleeding edge development happening every day, with layers now being built atop Bitcoin. Just remember that people thought video over the internet was impossible.

By that time, the time to settle transactions will be so long relative to the exchange rate volatility that transactions will be speculative ventures in themselves, and the only ‘users’ of the currency will be speculators. Actually we may already be there…

The author glosses over counterfeiting and fraud. Part of the reason bitcoin has value is that no one has been able to introduce a fake bitcoin to the system and spend it, nor has anyone been able to double spend their bitcoin. Ten years on the open internet – anyone can download software and become a miner or transact bitcoin – and total integrity AT THE PROTOCOL level. Yes, scams involve bitcoin, but Madoff did not undermine trust in the dollar and scams targeting bitcoin should not undermine trust in the larger bitcoin protocol. In short, there is some inherent value to bitcoin because of its resistance to fraud.

But how big of an advantage is this purported benefit, in the real world, given the resources needed for a Bitcoin transaction? Yes, counterfeiting and fraud occur using national currencies, but the transaction costs in time and computing power are far lower – and if fraud occurs, the legal system exists to provide recourse and generally does a reasonable job at deterring such crime.

But the frauds haven’t been carried out by abusing the blockchain, they’ve been carried out by abusing deals built around payment in bitcoin.
These frauds are actually a wry testimonial to bitcoin, because they show that bitcoin can do all the same things regular money does.

> Since when is double spending a risk with cash or wire transfers? You are creating a straw man.

Charge-backs and transaction reversals can be double spending. Cash can’t be double spent, of course, but then it’s easy to counterfeit.

The AT&T case is interesting. Number porting is a big issue and the service providers have a terrible record of giving away people’s phone numbers all too easily. It’s a known issue. On the one hand, it seems fair to hold service providers accountable in some way. On the other hand, this person was using his phone number to ‘secure’ his cryptocurrency wealth with a third party custodian; that’s unreasonable and siding with the victim here would effectively open service providers up to unlimited liability. My one reservation is the accusation being made that “AT&T employees profited from working directly with cyber terrorists and thieves in SIM swap frauds”.

Yeah. the other day.
Security and business-as-usual are each other’s deadliest enemies. If my cell provider had insisted on security back when I lost my cell phone, I wouldn’t have a phone at all; remembered the wrong PIN, supplied the wrong versions of answers to my identifying questions. And there are a lot of people, valuable customers even, like me.

One of the problems, though, is that people still have to pay their taxes in their respective national currencies. Unless countries either accept tax payments in these cryptocurrencies, or do away with taxes all together, there will still be a need for national currencies. All of this is ironic, since it would take state action to lend legitimacy to these cryptocurrencies.

I had the good fortune of meeting a couple of cryptocurrency enthusiasts recently. I quizzed them relentlessly about some of the issues raised above, and some others. My impression was that they simply are not the least bit interested in some of the important ideas raised above.

Because I really liked these people and found them intelligent and thoughtful, I hesitate to say anything disparaging. However, one of them had a “religious” aspect to his beliefs. I think the best word to use is “faith.” They had faith in the underlying procedures used in bitcoin and other cryptocurrencies. For example, the idea that the US government might force you to acquire its dollars to pay taxes or use them for fees, fines, and so forth was something of no interest whatsoever. One of the enthusiasts was convinced it was a mathematical certainty that the US dollar would “go to zero” because it isn’t founded on anything concrete (unlike bitcoin which is certain). It’s weird stuff.

The government can freeze your funds for any reason. Banks also can do this, too. That is the point of Bitcoin et al… nobody is in control of these crypto-currencies. It is all decentralized. Bitcoin belongs to all and nobody. To shut Bitcoin down, you must shut down the entire Internet.

Also… the energy consumption of Bitcoin is a fair claim but a lazy one. When people say Bitcoin consumes lots of energy, remember that fiat currencies have the cost of central bankers and the cost to “home” them (salaries, food, housing, transportation, et al)… the costs of bankers and all of the associated costs which also includes employees. That also includes computers to run the system. Tally all of that cost, and I suspect it will end up more than what Bitcoin requires.

Anyway, a major financial crisis is needed to verify whether Bitcoin works or not. That will come. I am not looking forward to it. Venezuela, Argentina and perhaps Turkey doesn’t count – too small potatoes. People from these countries did benefit from Bitcoin.

I would like to put in a quote by Nick Szabo in Twitter:

“The historically recent growth of centralized digital money has resulted in the transformation of money from being a medium of exchange, to many officials viewing it as primarily a medium of law enforcement. This is increasingly making such money more local and less trustworthy.”

Witness people like Kim Dotcom or countries like Russia.

A truly neutral currency is needed. Currencies issued by governments are by defintion, not neutral.

You seem to be blaming the currency itself, but the leverage governments have is over the central clearance and exchange systems… i.e. the banks, and electronic transfers. This is precisely why they are waging a war on cash, the actual form of currency that is anonymous, neutral, and holds value. It is also unclear how people in Turkey, e.g. would benefit from Bitcoin more than from an account denominated in Euros, Dollars or Swiss Francs.

I find your energy argument to be lazy but misinformed. Bitcoin destroys resources to create purely speculative value. In a way it is the perfect symptom of our hyper financialized, collapsing system. The cost of central bankers, etc. is another persons rental or restaurant income. If they weren’t central banking they would still be doing something (muggers or con artists I suppose), so they would still ‘cost’ society.

++ “Bitcoin destroys resources to create purely speculative value. In a way it is the perfect symptom of our hyper financialized, collapsing system.”

Your comparison of central bankers to muggers or con artists as a means of explaining the difference between the “cost” of cenrtral bankers and the cost of crypto currency energy consumption, however, is confusing. It’s as if you are trying to kill two birds with one stone; make your comparison AND get a dig in on central bankers at the same time.

Otherwise, you’ve put your finger on the real weakness of crypto currencies (destroy resources for speculation) as well as on the underlying reason they are so successful. In our collapsing system (hyper financialization, etc.) corruption itself has become a vehicle for enrichment of the privileged based on the tradeable value of leveraged speculation.

++ “Bitcoin destroys resources to create purely speculative value. In a way it is the perfect symptom of our hyper financialized, collapsing system.”

Your comparison of central bankers to muggers or con artists as a means of explaining the difference between the “cost” of cenrtral bankers and the cost of cryptocurrency energy consumption, however, is confusing. It’s as if you are trying to kill two birds with one stone; make your comparison AND get a dig in on central bankers at the same time.

Otherwise, you’ve put your finger on the real weakness of cryptocurrencies (destroy resources for speculation) as well as on the underlying reason they are so successful. In our collapsing system (hyper financialization, etc.) corruption itself has become a vehicle for enrichment of the privileged based on greed, leverage and pure perception.

Its usefulness as a means of exchange makes it a money commodity, with other money characteristics fast developing. There is non-speculative demand for the _values_ locked in Bitcoin scripts. No surprise that it would attract speculation as well, of course.

The burned resources are very relevant to its usefulness – proof of work is an essential element of its design – but that doesn’t mean it’s backed by or otherwise based on those resources or indeed any commodity — it is not a ‘commodity money’.

It being an emerging sound money _not_ based on a commodity is what makes it really interesting (and challenging).

As a means of exchange it fails because of the inherent friction in transactions, which combined with the speculator-driven volatility makes it very unreliable for mundane transactions, not to mention the external constraint of the transactions being capital gains/losses for tax purposes.

Medium of exchange
Store of value
…
…
…
… and the last function which no one save Chartalists, Post-Keynesians and some other Heterodox economists give prominence:
Unit Of Account

I agree with the article in that there is an opportunity to introduce alternate currencies, but BitCoin is not the answer. I think a global community currency backed by producers of goods willing to spend and accept it as payment is the best start to such a currency. The only issue is having an endowment of sorts to get the production started.

So to extend Mr. Smith’s example. Suppose he decided that he was truly done with using a national currency and decided to spend all of it procuring goods he could then sell in exchange for his clients’ ValueCoins. That way whenever the rolled lucky dice online or whatever, they would have somewhere to spend their VC’s; instead of just hoarding them in anticipation of inflated value.

Richard Murphy (taxresearch.org.uk) has suggested two reasons why national currencies win out over cryptocurrencies. The first is that a country demands that taxes are paid in its national currency. This means that there must always be some demand for the currency. There is, however, a second reason. Transactions involve contracts. If a transaction using the national currency goes sour, the law of the country can be invoked. But if a transaction attempts to avoid tax by using a cryptocurrency and the deal goes sour, there is no obligation for the state to be involved. One of the functions of tax is to act as an insurance policy for the enforcement of contracts.

> But if a transaction attempts to avoid tax by using a cryptocurrency and the deal goes sour, there is no obligation for the state to be involved.

Does that apply to any transaction that attempts to avoid tax? If not, seems odd to apply that rule only to transactions involving cryptocurrency.

> The first is that a country demands that taxes are paid in its national currency. This means that there must always be some demand for the currency.

True. Perversely, some would argue that governments also insist that people use cryptocurrencies for certain transactions (for example, where privacy is paramount and using cash is impractical). You could go so far as to say that governments subsidize Bitcoin each time that e.g. put pressure on financial institutions and payment companies to cut off financial services to certain sectors (see Operation Choke Point). That sets something of a floor in a similar way to taxes. (Not at the same scale, of course.)

Heard a funnie around the time of crypto peak e.g. speculators hope for high price in a non socially productive gamble, so they can convert crypto back to fiat and buy RE that suffers the same high prices – for the same reasons….

But as Bertrand Russell observed, “The method of ‘postulating’ what we want has many advantages; they are the same as the advantages of theft over honest toil”…